Fitch Affirms Raizen's IDRs at 'BBB'

June 21, 2016 04:47 PM Eastern Daylight Time

SAO PAULO--(BUSINESS WIRE)--Fitch Ratings has affirmed Raizen Combustiveis S.A.'s (Raizen
Combustiveis) and Raizen Energia S.A.'s (Raizen Energia) Long-Term
Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB' and
National Long-Term Ratings at 'AAA(bra)'. Fitch has also affirmed at
'BBB' the rating of the senior unsecured notes due in 2017, issued by
Raizen Energy Finance Limited, a fully-owned subsidiary of Raizen
Energia S.A. The Outlook for the Foreign Currency IDRs is Negative
following the Outlook for Brazil's sovereign rating. The Outlook for the
Local Currency IDRs and National Scale Ratings is Stable.

The ratings benefit from Raizen's strong financial profile, underpinned
by conservative capital structure and robust liquidity. Fitch's
expectation that the company will maintain positive and strong free cash
flows (FCF) in the coming years was factored in the analysis. Raizen
Combustiveis' stable EBITDA margin and Raizen Energia's expected higher
prices for its volatile sugar and ethanol (S&E) businesses were also
considered as positive.

Raizen's FC IDRs are two notches above Brazil's country ceiling due to
the relevance of Raizen's exports, cash and standby credit facilities
provided abroad and presence of meaningful international shareholder in
its ownership structure.

Strategic Importance for Shareholders

The ratings incorporate the implicit financial strength and potential
support from shareholders. Raizen is the second largest downstream
market for Shell globally and is a key vehicle for Shell's growth in the
renewable energy sector. Raizen also benefits from Cosan's expertise in
the sugar and ethanol (S&E) business. Shareholder commitment is
demonstrated by their stand-by USD500 million committed line of credit.

Fitch views Shell's 10-year call option to be credit positive. Under the
JV agreements, Shell has a call-option to acquire the remaining 50% of
the JV from Cosan at the 10th and 15th anniversary of the partnership.

Increased Contribution from Downstream Activities

The downstream business has increased its importance in the combined
results for Raizen, which is accretive to ratings as it reduces the
potential negative impact from the S&E industry cash flow volatility.
The downstream business accounted for approximately 43% of Raizen's
EBITDAR and cash flow from operations (CFFO) in fiscal 2016, favorably
comparing to 31% and 36%, respectively, for fiscal 2012. Fitch forecasts
the downstream business to stay within the 40% - 45% range as a
proportion of Raizen's EBITDAR over the next two years.

Raizen's ratings incorporate the representative market shares the
company holds in its businesses. The company is the third largest fuel
distributor in Brazil with a 20% market share in March 2016. In the S&E
industry, the company is the leading global producer, with an 11% share
in Brazil's fragmented market, and the country's largest generator of
energy from sugar cane bagasse.

Expectation of Positive FCF

Fitch expects Raizen to continue generating strong operational cash
flows over the next four years. For the fiscal 2016, Raizen's
consolidated funds from operations (FFO) and CFFO were BRL4.3 billion
and BRL4.1 billion, respectively. CFFO was sufficient to finance capex
and dividends of BRL4.1 billion, which resulted in FCF at breakeven
level. Fitch believes Raizen has the flexibility to reduce these
payments if needed to maintain a strong credit profile. The agency
projects positive FCF as sugar prices are recovering and expansion capex
in the S&E business is reduced. As of March 31, 2016, net revenues and
EBITDAR of BRL74 billion and BRL6 billion, respectively, translated into
margin of 8.1%, in line with the 8.0% reported for fiscal 2015.

Adequate Operational Performance

Raizen Combustiveis and Raizen Energia present adequate performance for
their individual businesses. Raizen Combustiveis benefits from its large
scale as the third largest fuel distributor in the country, with sales
volumes of 25 billion liters in fiscal 2016, flat compared to fiscal
2015 despite country's challenging economic scenario. EBITDAR margin of
4.1% in fiscal 2016 is consistent with previous years.

Raizen Energia's EBITDAR margin of 29% in fiscal 2016 is below its peers
due to a cane origination mix that favors a more balanced proportion
between own and third party cane. The company presents high
mechanization levels in both planting and harvesting activities and
agricultural yields compared to industry average. Crushed volumes
improved 10% in fiscal 2016 over the previous year and the steep
recovery of sugar and ethanol prices seen in the second half of 2015
contributed to Raizen Energia's stable profitability.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

-- Crushed volumes near 62 million tons in 2016/2017, increasing 1% per
year in each crop season;

-- Capex to be significantly reduced at Raizen Energia following the end
of the expansion program;

-- Average sugar prices at USD16 cents/pound from 2016/2017 on;

-- FX rate of BRL4 during the entire projection period.

-- 7% increase in domestic ethanol prices in 2016/2017.

-- Sales drop of 5% in the downstream business in fiscal 2017 and sales
growth rate in line with historical average for the following years.

-- Dividend payouts as high as it takes for the company to remain with a
net leverage below 2.0x, coupled with positive FCF and excess of cash
over short-term debt position.

RATING SENSITIVITIES

Deterioration of capital structure due to excessive dividend payouts or
large debt-financed acquisitions and weaker operating cash flow
generation that would lead to a net leverage ratio above 2.5x on a
consistent basis, could trigger a downgrade. Any evidence of a decrease
in business importance to Shell could also pressure Raizen's ratings.
Also, the impact of a new potential downgrade of Brazil's Sovereign
Rating on Raizen's FC IDR would be evaluated as the company's FC IDR can
stand between two and three notches above Brazil's country ceiling.

An upgrade is unlikely in the short term due to the inherent
volatilities in the S&E industry and uncertainties relating to fuel
policies in Brazil.

LIQUIDITY

Raizen has a track record of maintaining a strong credit profile,
underpinned by low leverage and robust liquidity position. As of March
31, 2016, Raizen had BRL4.3 billion of cash and marketable securities,
excluding restricted cash, and BRL2.5 billion of short-term debt,
yielding a 1.7x coverage ratio. This ratio compares unfavorably with
2.5x coverage ratio reported for March 31, 2015, but it remains at a
robust level considering the positive FCF forecast by Fitch for the next
four years. The stand-by committed credit facility from shareholders in
the amount of USD500 million also strengths Raizen's liquidity profile.

Raizen's total adjusted debt amounted to BRL16.4 billion as of March 31,
2016, which included inter-company loans and tax financing that should
be reimbursed to both Cosan and Shell in the context of the creation of
the JV in 2011. These loans are fully covered by judicial deposits and
other non-current financial assets. Raizen's net adjusted debt/EBITDAR
stands at a conservative 1.7x when these intra-group related debts are
excluded from the calculations.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Raizen Energia

-- Long-Term Foreign-Currency IDR at 'BBB';

-- Long-Term Local-Currency IDR at 'BBB';

-- National Long-Term Rating at 'AAA(bra)'.

Raizen Combustiveis

-- Long-Term Foreign-Currency IDR at 'BBB';

-- Long-Term Local-Currency IDR at 'BBB';

-- National Long-Term Rating at 'AAA(bra)'.

Raizen Energy Finance Limited

-- Senior unsecured notes due 2017 at 'BBB'.

The Outlook for the Foreign-Currency IDRs is Negative. The Outlook for
the Long-Term Local-Currency IDRs and National Long-Term Ratings is
Stable.

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